By Jack Guo
Recently, Nvidia’s decision to purchase ARM has shocked numerous companies in the semiconductor industry. Semiconductor is an industry that has extremely high barriers of entry, which means that very few firms are effective players in this market. In other words, the deal will have an enormous impact on all semi firms. For Nvidia, purchasing ARM reiterated its ambition to march into new sectors such as CPUs and AI. As for other players in the market, this could potentially put them at a disadvantage when it comes to competing with Nvidia in terms of market shares and innovations.
Under the agreement, Nvidia will pay Softbank a total of $21.5 billion in company common stock and $12 billion in cash, which includes $2 billion payable at signing. This is all part of the total 40 billion acquisition deal. On a side note, Nvidia will issue 1.5 billion in equity to ARM employees if the acquisition is approved. However, it is unclear whether regulatory approval will eventually take place due to the necessary agreement from the US, UK, China, and the EU.
Nvidia has traditionally dominated the market for graphical processing units(GPUs), which is a key component of the video gaming industry. In the fourth quarter of 2019, the company controlled 68.9% of the GPU market share. However, despite its strength in the GPU sectors, Nvidia currently has no presence in the CPU market. More specifically, Nvidia lacks products such as intel’s x86 chip that are capable of performing complicated applications or calculations for devices such as smartphones, tablets, and automobiles. ARM holdings is a perfect match for Nvidia since it designs smart sensor chips that are used to power 90% of the world’s smartphones. Instead of direct manufacturing, ARM licenses its chip designs to any company that wants them, and then allows the others to manufacture. Due to that fact that ARM is already partnered with companies such as Apple, Samsung, and Dell, it’s very likely that Nvidia will become a heavy weight player in the CPU market if the merger were to take place.
Another key reason for NVIDIA buying ARM is because it believes that the combined expertise of both companies could help them to become a front-runner in AI development. For instance, the likes of Qualcomm(semi), Samsung(phone), Daimler(auto), Audi(auto), NXP Semiconductors, and MediaTek(semi) have already been associated with Arm for their self-driving car development. ARM has also been making a stronger push into self-driving car development itself of late. It introduced a new chip design meant to handle data streams coming out of the sensors of an autonomous car in real-time in late 2018. Meanwhile, Nvidia’s CEO Jensen Huang has also mentioned self-driving technology as its key development back in March 2020. Nvidia will be able use ARM to power its automobile chip sector and open-up a new revenue stream in the future.
Nvidia successfully buying ARM would present Intel its most significant challenge since its founding. Intel has long boasted its enormous role as the only firm that is capable of both designing and manufacturing. In July 2020, Intel CEO Bob Swan announced that the company would end the production of its own CPU units, which could result in staggering loss of future revenue for Intel.
For comparison, when Intel admitted that its production has fallen behind its competitor, TSM, its stock price plummeted by more than 18% on July 23rd. Nvidia’s innovative culture could prompt ARM to design a superior CPU chip that could potentially eat into the grounds of the x86s. Meanwhile, Intel’s 7nm chip is anticipated to be delayed for about a year. This could be extremely detrimental as Nvidia and AMD has already come out with their 7nm chip. It wouldn’t be shocking to hear that the other two firms will dominate over Intel in the PC/smartphone CPU market. So, it is almost certain that: Intel is in trouble!
Adding on, Nvidia’s potential technological breakthrough in the self driving industry just casts more shadows onto Intel’s future. While Nvidia has been signing agreements with various automakers, Intel has fallen behind as the company’s executive missed out on this new developing trend. After all, although its market volume is currently tiny, this market could grow exponentially as more companies invest into the industry. If Nvidia were to develop a reliable technology, this could make Nvidia the new leader of the semi industry. On the other hand, Intel will fall from its leader status to become the “Kodak” of the semiconductor industry. In the end, Intel’s situation is dire, and it needs to quickly adjust its development plans if the company wants to keep up with the latest trend. □
- Lyons, K. (2020, September 13). Nvidia is acquiring Arm for $40 billion. Retrieved October 05, 2020, from https://www.theverge.com/2020/9/13/21435507/nvidia-acquiring-arm-40-billion-chips-ai-deal
- Knight, W. (n.d.). Nvidia’s Arm Deal Would Make It the Center of the Chip World. Retrieved October 05, 2020, from https://www.wired.com/story/nvidias-arm-deal-make-center-chip-world/
- Cherney, M. (2020, September 20). Nvidia’s Latest Deal Could Make It the World’s Most Important Chip Maker. Retrieved October 05, 2020, from https://www.barrons.com/articles/nvidias-deal-for-arm-holdings-is-risky-and-very-smart-51600473858